Dialogue with Distributed Capital Shen Bo: My Understanding of Blockchain and Investment Principles

This article was first published on May 16, 2018, on the Chain Catcher WeChat public account, by author Li Zhao.

1. Blockchain and Distributed Business

Chain Catcher: What do you think blockchain is?

Shen Bo: Currently, people have different understandings of blockchain. I more agree with the view that blockchain is a large-scale collaborative tool.

Blockchain consists of two parts: the underlying technology and the token economy ecosystem, both of which are indispensable. The underlying technology of blockchain is essentially a distributed cryptographic ledger based on consensus, where the recorded data is an objective fact recognized by all relevant parties. This ensures that the data on the blockchain is highly consistent, immutable, and completely transparent.

This brings two benefits: First, whether you are a company or an individual, you are an equal node on the computer, enjoying equal rights to information; second, under the same rights to information, everyone in the network makes decisions point-to-point, reaching consensus through a set of algorithms to determine economic activities, enabling large-scale collaboration.

However, under large-scale collaboration, if there is no flow of funds and no precise incentives for each participant to contribute, it is impossible to form a viable new business model. Tokens integrate the purpose of business and the relevant parties' incentives, quantifying each participant's contribution, tracking the contribution cycle through continuous rights confirmation, and allowing for custodianship and programming, thus presenting and creating value in real-time. Therefore, tokens are the soul of the blockchain economy.

Chain Catcher: What is the relationship between distributed business and blockchain?

Shen Bo: Distributed business is a mutually empowering structure and a new business model of blockchain. Everyone is exploring the possible ways of such a model, but it is not the entirety of the blockchain economy.

Chain Catcher: Could you please provide a definition of distributed business? You proposed the concept of distributed business as early as 2015.

Shen Bo: Currently, no one can provide an accurate definition of distributed business; all who recognize it are participating in practice. It is more of a concept now, which has two connotations: first, you are in me, and I am in you; second, seek to be where you are, not to possess all, incentivizing mutual integration, ultimately achieving the goal of I for everyone, and everyone for me.

Chain Catcher: "I for everyone, and everyone for me" still seems like a very idealized state. What might be the foundation for its realization?

Shen Bo: The foundation for realization is the blockchain economy. The distributed structure is the basis for large-scale collaboration among people, consensus algorithms promote the generation and transmission of trust, and cryptography ensures that the security of private data is protected.

Trust means believing that others treat you as an end rather than a means— you will not be exploited or manipulated by others for their own interests to achieve their emergency goals, but rather be regarded as a valuable existence. In the past, we needed intermediaries to endorse commercial actions between parties before we dared to trust each other, which increased the costs of time and expenses.

However, blockchain allows data and trust to flow directly between organizations and individuals, creating a transformation in production relationships, reducing friction, and improving efficiency, thus increasing the benefits for all. In distributed business, economic activities are no longer adversarial competition between struggling sellers and buyers; instead, they become collaborations between projects and like-minded individuals, replacing zero-sum games with win-win situations.

Chain Catcher: So can we understand that blockchain will generate new increments?

Shen Bo: Yes, incentivizing mutual integration is a win-win situation, generating new increments compared to zero-sum games. Game theorists classify games into zero-sum and non-zero-sum types. A zero-sum game means that one party's victory is the other party's loss, like in chess, where both sides aim to defeat each other, or else they bear the loss. Incentivizing mutual integration is a non-zero-sum game, where both parties can cooperate for mutual benefit, truly achieving "collective wisdom, crowdsourcing, collective evaluation, and shared enjoyment."

Chain Catcher: "Collective wisdom, crowdsourcing, collective evaluation, and shared enjoyment" sounds like a discussion about the change in production relationships. Could you please explain further?

Shen Bo: The so-called change in production relationships goes back to the essence of blockchain; it is a tool for large-scale collaboration. Simply put, collective wisdom refers to blockchain promoting the generation of collective intelligence, crowdsourcing refers to the rapid splitting and allocation of tasks, collective evaluation means being able to receive a large amount of feedback in a timely manner to form standards or consensus, and shared enjoyment determines that all human wisdom and labor achievements, including our intellectual property and data, cannot be owned individually.

Chain Catcher: What do you think is the relationship between distributed, shared, and sharing?

Shen Bo: There is a misconception here: the sharing economy is not the same as the sharing economy. The sharing economy is a monopolized market after centralizing a resource, while the sharing economy is about sharing resources with the community. However, when the sharing economy scales and industrializes, it becomes the sharing economy because the entry of professional services will inevitably push out non-professional services that lack competitive quality, thus dismantling the essence of sharing and degrading it into a disguised rental market.

Didi Chuxing is a typical product of the exclusive economy; it spent over 6 billion to monopolize market share and gained pricing power. For consumers, although it solved the pain point of hailing a ride, prices have risen instead of falling, so it is not inclusive finance; it is essentially a capital-driven market, another form of monopolistic economy. In contrast, distributed business is merely a manifestation of the sharing economy; it is community-driven from the start, with a reasonable incentive mechanism.

Chain Catcher: Does distributed business mean decentralization?

Shen Bo: There is a decentralized thinking behind distributed business, but it does not mean decentralization; more accurately, it means de-intermediation.

Blockchain primarily addresses the issue of rights confirmation, where all data should be returned to the creators of the data; secondly, all actions can be quantified and monetized, where each person is the CEO of their own data, able to manage their data and earn money; finally, smart contracts execute automatically, are immutable, completely transparent, and highly secure, greatly reducing the cost of trust and minimizing transaction friction, thus improving efficiency.

In fact, centralization and decentralization are relative concepts, and they are constantly converting between each other. Complete decentralization is a beautiful utopia, an ideal; it is not our ultimate goal in exploring distributed business. Our ultimate goal is still to improve overall efficiency.

2. Investment Insights and Industry Outlook

Empowering multiple parties, achieving mutual success, and enriching oneself have always been my investment principles. Entrepreneurs, investors, and governments should all practice self-discipline and insist on doing the right thing.

Chain Catcher: How to value blockchain projects?

Shen Bo: According to Metcalfe's Law, the valuation of internet models is proportional to the square of the network effect, while the valuation of blockchain models is based on the cube of the network effect (number of participants). This is also why I believe that once a blockchain social organization is established in the same field, it is difficult to have a second one, as the second one easily encounters a siphoning phenomenon, being drawn to the first one. In the blockchain world, users are credit, and data is value. The more users there are, the more stable the system becomes, thus the better the credit, and the more real and effective the data carried by the blockchain, leading to greater value.

Chain Catcher: What characteristics should a good project have?

Shen Bo: First, it needs to solve industry pain points. Many teams currently only use a token model but do not address industry pain points, and not all industries are suitable for solving their pain points with blockchain;

Second, there should be a reasonable architectural design: how the community is established, how tokens are designed and distributed;

Third, establish a good governance structure that can effectively manage the project's progress and form a routine for community reporting.

Chain Catcher: What kind of entrepreneurs do you recognize?

Shen Bo: Besides having strong business capabilities, they should also possess leadership qualities, a spirit of sharing and altruism, and the ability to attract talent; they should have a continuous hunger and be good at learning; they should have an open mindset, unbound by rules; and they should have empathy, able to think from others' perspectives.

Chain Catcher: If you were to give a piece of advice to new entrepreneurs entering the field, what would it be?

Shen Bo: First, I want to say that reputation is the most important asset in the blockchain world. Operators should cherish their reputation and start businesses legally and compliantly;

Secondly, I believe that for entrepreneurs, clear positioning and deep thinking are crucial. The barriers to blockchain are actually quite high, and the current focus is on technology orientation, including underlying architectural technology logic and economic models, rather than simply smart contract commercialization of business models. Entrepreneurs need to think clearly.

Chain Catcher: We know that distributed capital has made many investments abroad. What do you think are the differences between domestic and foreign projects?

Shen Bo: When looking at foreign projects, we selectively judge their quality, while domestically we need to judge their authenticity. Overall, foreign projects have accumulated and settled, and financing is not just for the sake of financing; at least one to two years of foundation exists in terms of overall concepts and technologies. Not all tracks can utilize blockchain, nor can all projects be implemented and recognized by community investors. Foreign projects have explored more than we have domestically, and we need to study and learn more. This is also why I say that engaging in blockchain requires a global perspective.

In terms of technology, China is lagging significantly; many projects basically lack a CTO, and there is a severe shortage of real blockchain development engineers in the country. In terms of both technical foundation and model innovation, there is roughly a two-year gap between domestic and foreign projects, but I believe that domestic development can catch up quickly.

Chain Catcher: Some investors and companies believe that China's blockchain technology innovation is leading because we have the most patents, while you believe the technology is lagging. Previously, you mentioned that good blockchain project technology should be open-source. Are these two views contradictory?

Shen Bo: These are two completely different approaches. Patents and copyrights belong to traditional business practices, while open-source is a community approach. The existing company structure is a cornerstone of capitalism, aimed at maximizing shareholder interests, which requires a closed loop—what's mine is mine, and what's yours is still mine; this is a zero-sum game. In contrast, the community mechanism is I for everyone, and everyone for me.

Patents and open-source technology were evenly matched two years ago, but in the subsequent development of distributed business, the open-sourcing of key information and technology will become an indispensable part of large-scale collaboration.

Chain Catcher: How do you view the combination of internet/traditional enterprises and blockchain?

Shen Bo: The true blockchain business model grows out of public chains, not merely a company's simple application of blockchain technology to succeed, so I do not recognize consortium chains. A public chain with a good mechanism will give rise to rich business models, such as decentralized commerce, decentralized insurance, and banking, where everyone is willing to pool all resources to collaborate and empower each other.

Internet companies have taken centralization to the extreme, where all data is owned by the company and not open to the outside. Therefore, for any industry transformation, the first consideration should be where the data sovereignty lies; can you split the data down to the individual level and then share it comprehensively? If you cannot clear yourself and abandon vested interests, then the combination of internet or traditional enterprises with blockchain will be a false proposition, while a combination based on data sovereignty and blockchain has the potential to succeed.

Chain Catcher: How will the entire blockchain industry develop in the future?

Shen Bo: First, blockchain, as a business model, is essentially a tool for large-scale collaboration, not an industry; secondly, we cannot predict its final form, but we can judge which scenarios can be sequentially blockchainized based on blockchain logic.

For example, industries need specific infrastructure; business models that did not exist in the past can now be realized under blockchain, which relates to industry growth. Another example is faster landing multi-party scenarios, currently mainly in supply chain management, finance, and traceability.

Ultimately, data that cannot self-validate on the blockchain may become a disadvantage, with lower efficiency and trust levels, greatly affecting the commercialization process of enterprises. There is also the possibility of data being reused; for example, one of the issues with credit in China is asset double-mortgaging because all data is not open. So in the end, it is not about which company or technology drives progress, but rather that all enterprises must put data on the chain to adapt to the environment.

Chain Catcher: What are the investment plans for distributed capital in 2018?

Shen Bo: In 2018, we believe that the blockchain industry will continue the explosive momentum seen since 2017. As an investor across the entire blockchain industry, we will continue to support high-quality projects through capital, empower the best entrepreneurs, and build a more complete blockchain ecosystem.

Specifically, we hope to promote industry development through the following three methods:

First, continue to assist like-minded talents globally in initiating RMB and USD funds to invest in various blockchain application projects;

Second, assist in the construction of various blockchain ecosystems through the establishment of ecological funds;

Third, continue to promote cooperation with traditional business institutions to jointly create a digital economy entrepreneur elite club, empowering projects suitable for blockchain and developing more application scenarios.

Chain Catcher: Blockchain talent is extremely scarce. How does the investment decision-making and profit distribution mechanism within distributed capital attract and retain talent?

Shen Bo: First, we hope to attract like-minded talents to contribute to the blockchain industry together; secondly, for outstanding talents, we uphold the principles of blockchain internally, hoping everyone can maximize their personal value. For example, we provide global investment opportunities and perspectives, and distributed capital can access top-tier blockchain projects worldwide, making it a great platform for those aspiring to the blockchain industry.

In terms of investment decision-making, we still lean towards traditional institutional models, but with higher execution efficiency. We have internal funds that provide incentive mechanisms based on contributions to corresponding members, which is not much different from traditional investment institutions.

Chain Catcher: With more traditional VC/PE and commercial forces entering the field, they have more money, resources, and brand accumulation. How do you view the upcoming competitive landscape in blockchain investment?

Shen Bo: The relationship between distributed capital and traditional investment institutions and commercial forces is not one of competition but rather mutual cooperation and empowerment. We warmly welcome traditional VC/PE to enter the blockchain world, as their participation will bring more talent, capital, management experience, and resources to jointly promote the healthy growth of the industry.

At the same time, blockchain is inherently a cross-border collaborative endeavor. We need the scenarios and users from traditional business institutions to implement various chains, and traditional business institutions also need blockchain professionals to help transform their business models and empower them through blockchain.

Chain Catcher: This year marks your fifth year of going all-in on blockchain investment. Have there been any investment philosophies or principles that you have consistently adhered to during these five years?

Shen Bo: Empowering multiple parties, achieving mutual success, and enriching oneself have always been my investment principles. I generally provide help when it is most needed rather than just adding the finishing touch; I do not engage in opportunistic behavior. The projects I participate in are all investors; I do not accept gifts, do not act as an advisor, and I will also lock in long-term holdings. For some projects, I might even invest and incubate without knowing the market response at the beginning.

For me, supporting the growth of the blockchain industry is far more important than making money. This industry is constantly being pushed up, but everyone is not yet well-prepared; excessive bubbles will lead to bad money driving out good money. What is more important now is to do practical things and do the right things, rather than to fuel the bubbles in this industry.

Additionally, if we cannot contribute to a project, we will not invest. We also need to assess whether the founder is worth our time and companionship. There are too many temptations regarding human nature in this process, and many people go astray, making persuasion ineffective. Because a person's character is hard to change, I will respect the founder's choices, but as an investor, I will adjust my portfolio.

Entrepreneurs can build platforms based on their experiences, insights, and our opinions, and only if the founder maintains their original intention and wholeheartedly dedicates themselves to the project's market, brand, service, resources, etc., is the project more likely to succeed. So we are now doing subtraction, focusing only on two types of investments: one is incubation from zero to one, and the other is the secondary market. Finding excellent projects for heavy investment, they must at least have the opportunity for a 100-fold growth.

Currently, the blockchain industry is still in its infancy, with various chaotic phenomena and a bubble phase where people are restless. We hope to set an example by adhering to the bottom line of value investment in the industry and jointly promoting the healthy development of the ecosystem with partners in the industry.